Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. Part 1: Individuals

   A taxpayer's filing status for the year is generally determined as of:

   • a.The first day of the tax year
   • b.The date of the taxpayer's last marital change
   • c.The last day of the tax year
   • d.The date the return is filed

   Answer: c

   Explanation: Filing status is determined by the taxpayer's marital and household situation on the last day of the tax year, December 31 for calendar-year taxpayers (§7703(a)(1)). A taxpayer whose spouse died during the year is treated as married for that year. The first day of the year, the filing date and the date of the last marital change are not the test.

2. 2. Part 1: Individuals

   The distinction between a refundable and a nonrefundable credit is that a refundable credit:

   • a.Can offset income tax and SE tax, but not create a refund
   • b.Can reduce tax below zero, with the excess carried forward
   • c.Reduces AGI before tax is figured, then reduces tax
   • d.Can reduce tax below zero and be paid as a refund

   Answer: d

   Explanation: A refundable credit (such as the EITC, the additional child tax credit or the refundable part of the AOTC) can reduce tax below zero and the excess is paid as a refund. A nonrefundable credit can reduce tax only to zero; some nonrefundable credits carry the excess forward, which is the confusion in one distractor.

3. 3. Part 2: Businesses

   Intangible assets such as acquired goodwill and going-concern value (Section 197 intangibles) are:

   • a.Not recoverable until the business is sold
   • b.Amortized over 10 years, like foreign R&E
   • c.Depreciated under MACRS over 5 years
   • d.Amortized ratably over 15 years

   Answer: d

   Explanation: Section 197 requires acquired goodwill, going-concern value, covenants not to compete and similar intangibles to be amortized straight-line over 15 years (180 months) starting with the month of acquisition. They are not MACRS property, the 15-year period is not optional, and the pre-1993 rule that goodwill was recoverable only on sale no longer applies.

4. 4. Part 3: Representation, Practices & Procedures

   Circular 230 §10.35 requires that a practitioner:

   • a.Accept only matters the practitioner has handled before
   • b.Hold a degree in accounting or taxation from an accredited school
   • c.Have the knowledge, skill and preparation the matter requires
   • d.Carry professional liability insurance while representing clients

   Answer: c

   Explanation: Section 10.35 requires competence: the appropriate level of knowledge, skill, thoroughness and preparation for the matter. Competence may be gained by consulting experts, studying the relevant law or associating with a competent practitioner, so a new type of matter is allowed. No degree or insurance is mandated.

5. 5. Part 3: Representation, Practices & Procedures

   A preparer generally avoids the IRC §6694(a) penalty for an undisclosed, non-tax-shelter position if the position had:

   • a.Any colorable argument, if the client insists on the position
   • b.Substantial authority, or a reasonable basis with adequate disclosure
   • c.A reasonable basis, whether or not the position is disclosed
   • d.A more-likely-than-not chance of success, in every case

   Answer: b

   Explanation: Under §6694(a)(2), a position is not unreasonable if it had substantial authority, or, if disclosed, a reasonable basis. Tax shelter and reportable transaction positions require a reasonable belief that the position is more likely than not correct. A reasonable basis alone, without disclosure, does not protect an undisclosed position.

6. 6. Part 2: Businesses

   A calendar-year business signs a contract for and places in service $500,000 of new 7-year equipment in March 2025. It does not elect §179 or elect out of bonus depreciation. What is its 2025 depreciation?

   • a.$300,000
   • b.$500,000
   • c.$71,450
   • d.$200,000

   Answer: b

   Explanation: Qualified property acquired after January 19, 2025 is eligible for 100% bonus depreciation (§168(k) as amended by OBBBA §70301), so the entire $500,000 is deducted in 2025 unless the taxpayer elects out. $200,000 applies the 40% rate for property acquired before January 20, 2025, $71,450 is regular MACRS with no bonus, and $300,000 applies the 60% rate that applied to property placed in service in 2024.

7. 7. Part 2: Businesses

   An exempt organization that is required to file an annual return fails to file any Form 990, 990-EZ or 990-N for 3 consecutive years. What happens?

   • a.It is converted into a private foundation
   • b.Its tax-exempt status is automatically revoked
   • c.It pays a one-time penalty but remains exempt
   • d.Its exemption is suspended until it files

   Answer: b

   Explanation: Under §6033(j), an organization that fails to file a required annual return or notice for 3 consecutive years automatically loses its tax-exempt status as of the due date of the third return. It must apply for reinstatement. Daily penalties for late returns are separate.

8. 8. Part 1: Individuals

   Rex will receive a $30,000 bonus. He can take it in December 2025 or January 2026. His 2025 rate is 35%, and in 2026, when he retires, it will be 22%. All else equal, what is the better timing and why?

   • a.Either; the bonus is taxed at the same rate in both years
   • b.December 2025, because the constructive-receipt rule requires it
   • c.January 2026, because it is taxed at 22% instead of 35%
   • d.December 2025, because income should always be taken when earned

   Answer: c

   Explanation: Deferring income into a year with a lower marginal rate saves 13 points of tax: $3,900 on $30,000. A cash-basis employee includes pay when it is actually or constructively received, so a bonus that is not available until January (under an arrangement made before it is earned) is 2026 income. Timing income and deductions to rate changes is standard individual planning.

9. 9. Part 1: Individuals

   A hurricane is declared a federal disaster, and the IRS announces relief postponing filing and payment deadlines in Kay's county. Kay lives there. What must she do to get the postponement for her 2025 return?

   • a.File Form 4868 before the regular due date
   • b.Nothing; the relief is automatic
   • c.Write 'disaster' on the return and attach Form 911
   • d.Request the postponement in writing within 30 days

   Answer: b

   Explanation: When the IRS grants disaster relief under §7508A, taxpayers whose address of record is in the covered area receive the postponement automatically. Those outside the area whose records are located there must call the IRS. Form 4868 is not needed, and Form 911 is a Taxpayer Advocate request.

10. 10. Part 3: Representation, Practices & Procedures

    A client could not produce receipts for $2,000 of office supplies, and the examiner allowed nothing. Which substitute evidence can support ordinary business expenses not covered by §274(d)?

    • a.Nothing; without receipts no deduction is allowed
    • b.A statement from the client's accountant
    • c.Bank records and other credible evidence
    • d.An estimate from the client's memory, accepted automatically

    Answer: c

    Explanation: Most business expenses may be substantiated by canceled checks, bank or card statements, invoices and other credible evidence, and a court may estimate an expense if some basis exists (Pub 583). The strict adequate-records rule of §274(d) applies only to travel, gifts and listed property.